Saving money is a good habit to develop. Saving money for the sake of saving isn’t beneficial for reasons we outlined in our previous article “Why you should not save money”. One of them being that inflation will reduce the value of your cash over time. That means you need to save for a purpose; which is usually to invest the money in income producing assets. However, saving money isn’t as easy as we may think. We all know that saving is a good habit, but when it comes to execution we’re unable to. According to SpendMeNot, 69% of Americans have less than $1000 in savings and the majority of them have nothing at all. It’s just like going to the gym or eating healthy. We all know that it’s beneficial, but having the discipline to do it is another story. To solve this issue, we need to analyze the root cause.
The reason why we find it difficult to save money is due to the challenge of immediate gratification. We want immediate comfort or pleasure. It takes a lot of willpower and discipline to delay gratification.
When you get that paycheck, it’s very tempting to please yourself; after all you worked hard for it right!? Why shouldn’t you give yourself a treat. Most people think that it’s because they have a low income that they’re unable to save money. 38% of Americans cite high expenses as the reason why they can't save money. Whatever the reason, these are just excuses; no matter how small your income is, you can still save money. If you’re unable to save $10 from $100, you won’t be able to save $100 from $1000. More money won’t solve money problems; in this case immediate gratification. No matter how much you earn, you’ll just match it with what you spend.
Scientists call this the “present bias”. As Schlomo Benartzi of the UCLA Anderson School of Management put it: “The problem is people feel like the future is not real. So it’s hard to save for the future”. To illustrate this, he performed an experiment with a group of students. He asked them whether they wanted some chocolate or a banana for a snack two weeks later when they meet. 75% of them said they wanted the banana. Surprisingly, two weeks later with the same choices in front of them, 80% of them chose the chocolate! This means that self-control in the future is not an issue. We all know that we need to save but we naturally put it off to tomorrow; a tomorrow that may never come. It’s difficult to delay gratification; it’s difficult to choose today over tomorrow.
A similar experiment was performed on monkeys. Scientists gave one group of monkeys an apple and they measured their physiological responses. The monkeys were extremely excited. To another group of monkeys, they gave two apples; same thing, they were also highly excited. Then the scientists took away one apple from the monkeys, guess what happened? They got really mad though they still had one apple! That’s exactly how we feel when we lose something. Saving sounds like losing something to us.
Benartzi and his colleague Richard Thaler of the University of Chicago designed a system to make saving money painless. They called it the “Save More Tomorrow” Plan. It is based on the fact that we want to save tomorrow and not today. The system is simple: You agree to automatically save a small percentage of your salary, say 10%, 5%, or even as low as 3%. The amount is so small that you wouldn’t notice the difference. Next, you make a commitment to save more in the future each time you get a raise. The more raises you get, the higher the percentage you save. The best part is that you wouldn’t feel as if you lost it since you never actually had it. The money will be automatically saved and it could be invested in a retirement account.
This plan was first tested in a company in the Midwest where the workers claimed that they were unable to save anything. After a lot of convincing from the researchers, they agreed to save just 3% and more after each raise. In just 5 years, with 3 pay raises, they were each saving just below 14% of their paychecks! 65% of them were saving 19% of their salaries on average. You can do same at your own level. There are several companies that offer the “Save More Tomorrow” and similar plans. If yours doesn’t, you can talk to HR about it. The best way to save is not to receive the money in the first place. Make your savings automatically before getting your paycheck. Contact your payroll office and get them to automatically divert a percentage of your salary to a retirement account of your choosing.
If you’re wondering how to get started with this, you can schedule an appointment with us(below) and we’ll guide you through the process. It’s time to secure your future.
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